A payment processor is essential for any business that accepts credit cards, debit cards, prepaid cards, gift cards, or cash in person or online. A payment gateway is only necessary for online retailers.

The Significance of Digital Payments in India

Digital payment has become one of the most preferred and largely accepted modes of payment after demonetization and during COVID in India. UPI was introduced in the same year in India as demonetization, i.e., 2016. Compared to older transaction modes like IMPS, NEFT, and cheque deposits, UPI was more user-friendly for small to medium-value transactions. Hence, the transition from cash payments to online payments was adapted in no time, from bill payments to general stores to e-commerce platforms to shopping to even sending money to friends and family. UPI transaction volumes have been growing at an average annual rate of about 50 percent over the past six years, according to the International Monetary Fund.

The aim of digital payments was to simplify and secure transfers by enabling multiple bank accounts on a single mobile platform, catering to both individuals and businesses and it quickly matured into a reliable solution across India with a push from the Indian government as well. Reserve Bank of India’s (RBI) Governor, Shri Shaktikanta Das “launched the Mission ‘Har Payment Digital’ on the occasion of the Digital Payments Awareness Week 2023. This is part of the RBI’s endeavor to make every person in India a user of digital payments. DPAW 2023 was observed from March 6 to 12, 2023 under the campaign theme “Digital Payment Apnao, Auron ko bhi Sikhao” (Adopt digital payments and also teach others)” to grow the cashless culture in India.

With consumers adopting digital payments rapidly, SME business owners will have to upscale their customer checkout experience by providing an array of digital payment options to customers to maximize revenues and throughput going forward. Payment gateways and payment processors are the two things that every digital SME merchant should be aware of but they can be confusing when differentiating. Let’s break it down and understand the difference between a payment gateway and a processor!

Payment gateway

A payment gateway is a consumer interface that identifies and verifies the customer’s card details and sends funds from a customer’s account or any payment method to the merchant's account. What is a payment gateway used for? Simply put, the payment gateway collects the customer's card data and directs it to the payment processor.

A payment gateway undertakes the following actions within one second:

• It integrates your online platform seamlessly
• It securely collects payment information for consumer transactions provided by the merchant and encrypts the information for safety
• It sends the information to a payment processor or an acquiring bank which performs fraud screening and then forwards the transaction to the card networks
• It notifies the merchant with a payment approval and rejection update and directs the shopper to the confirmation page or prompts alternative payment.

Understanding the Payment Gateway: From POS Terminals to Online Checkouts

A Point of Sale (POS) terminal facilitates a seamless shopping experience for your customers by accepting all in-store debit and credit card payments quickly, easily, and securely. When you use your card to pay at a physical store, the terminal acts as the payment gateway by sending your transaction information to the bank and card networks for processing, ensuring your payment is securely transmitted. On the other hand, an online store deploys a quick checkout web checkout portal as the payment gateway, where consumers feed their payment data/card details, to finish a purchase. This checkout portal is designed to be safe, secure, and user-friendly to protect customer data and prevent fraud. However, in both scenarios, the payment gateway securely transmits data and funds to the merchant’s account (this will be hyperlinked to an article that speaks about the merchant account) and completes the transaction at the customer’s end.

India's top 5 payment gateway businesses for 2023 according to Deccan Herald -

1. Cashfree Payments
2. Razorpay
3. CCAvenue
4. Easebuzz
5. PayU

Payment Processor

Although payment processors and payment gateways have certain similarities, they are not the same thing entirely. Unlike a payment gateway, which is a communication tool, a payment processor initiates the transaction and allows the merchant to accept payments. It is the banks and financial institutions that handle these transactions and are known as payment processors. A payment processor transmits the data between 4 points - the customer, the customer’s bank, the merchant, the merchant’s bank account and the point of sale (POS) terminal when a customer pays for their purchase using a credit or debit card, phone, or NFC card. Processors ensure that the funds are withdrawn and deposited correctly for in-store as well as online transactions.

Most payment processors are directly integrated with the merchant account which enables the merchant to directly receive the payment in his account. Alternatively, if a merchant has multiple outlets, the merchant can use a third-party payment processor.

Who facilitates the payment - Payment Gateway or Payment Processor for SMEs?

Think of it like a relay race, where the payment gateway passes the baton to the payment processor to cross the finish line and complete the transaction. A payment gateway is a communication tool that identifies and verifies details but it is a payment processor that processes the payment. So, while the payment gateway is important for securely processing online transactions, it's the payment processor that does the heavy lifting of actually facilitating the payment for the merchant.

Payment Gateway v/s Payment Processor

In the world of digital payments, understanding the distinction between a payment gateway and a payment processor is crucial for businesses. While they may sound similar, these two components play distinct roles in facilitating secure and efficient transactions. Demystifying few key differences you can take away.

Payment Gateway

• Creates a secure connection between the merchant's website and the payment processor
• Verifies transaction details, such as cardholder information and transaction amount
• Encrypts transaction data to ensure secure transmission
• Relays transaction details to and from the customer's card-issuing bank and the merchant's acquiring bank
• Software application that securely transmits transaction data

Payment Processor

• Handles card transactions for a merchant
• Processes the payment and ensures everyone gets paid
• Acts as a mediator between the merchant, banks, and card networks
• Transmits data between the merchant, issuing bank, and acquiring bank
• Actual company that handles card transactions